Export-heavy Germany is contending with a wave of disruptive changes that are altering the competitive landscape for both the country's largest corporations and its globally admired small and medium-sized enterprises, the Mittelstand. Wolfgang Fink, co-CEO of Goldman Sachs in Germany and Austria, discusses how German companies are adapting to twenty-first century market pressures.
This podcast was recorded on April 19, 2016.
The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.
Copyright 2016 Goldman Sachs. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where people from our firm shed their sights on developments currently shaping markets industries in the global economy. I'm Jake Seaward globule of corporate communications here at the firm
While Germany is generally perceived to be in a position of economic strength, that country faces, the same disruptive forces currently
pushing through economies around the world to discuss how Germany is adapting the twenty first century market pressures on joined by Wolfgang think the Kosovo of Goldman Sachs in Germany and Austria Wolfgang
No, the problem, thank you, so Germany's home to some of the world's best companies Bess recognised companies. What challenges are top of mine for your clients. Your german clients
they navigate and environment. That always seems to be changing. Thank you,
I think the key issue that occupies the german corporate landscape is clearly some. That's all
familiar to people here, it's d ever chain
environment and the periods of change seem to accelerate, as so many pressures coming from so many anger. Instead, a globally active company in most of these companies are reactive. Companies have to basically be on alert nonstop to adapt and to adjust. When you compared to the past, we had much longer cycles where people had something called planning security, where they could make plans to strategic plans and execute accordingly in these days,
disruptive forces, which I am sure we will be talking about a massive so that there are constantly on alert and that has to do with geopolitical risk that has to do with the
economies in various regions of the world that has to do with the technology.
the changes that has to do with scarcity of talent and and competition for talent globally. That has to do with Rob,
cereals that Germany is in a way dependent on as they are no big producer of raw materials have deposit of large raw materials of that size, and it has also
do with demographics if you look at it witches and ever aging population and the supply of new talent to sustained a system. Just to name a few so
big names in German. Business are pretty well known to global audiences, but someone argued that the country's real economic strength come from small and medium sized companies. The so called me just on so
for those who are listeners who is familiar with your part of a world, give us a little
the structure, the german business sector, ya, think
stand the so called mid sized company, which actually is a pretty wide, ranging definition I mean you could have companies that are sort of in terms of market value. A couple of hundred millions up to.
The billion companies sort of a small well established export oriented order, supply company next to Bosh, which probably one of the largest automotive supply companies in the world
Thought just to say this is a pre wide, ranging definition, but if you take the middle stand as such, it employs around sixty percent of the german workforce and diminished and companies have actually generated over a third of the economies of the german economy. Revenues hence
the driving force between Germans, economic progress, the interesting thing about the middle standards that is mostly privately.
So you want to get a lot of public companies in my party, public and private aren't, but mostly private on and so on.
The brands aren't so well known a lot of times because their manufacturing good that businesses consumer good
and they have no reason relates to raise their public profile exactly so. They are mostly be to be would say, and there in niches re often therein pretty small but global niches and their families.
And these families usually are focused on privacy and hence, as you said there not very well known. Having said that, these companies go through succession site.
and within a year long, we would estimate around twenty thousand of these companies being up for succession in a way having succession planning to do having to find a successor, which is quite a staggering number for this economy until that attract a lot of interest from within the country, but also from international interested parties. Buyers,
international groups, we still see an industry after industry, with its telecom or even banking or in other industries, national champions. You would expect a little bit
or consolidation. Sometimes why
Seen more of that in Europe and is actually very interesting question, as do would have expected that I think you have seen some clearly in particular also with respect to mid sized companies that have consolidated across
Europe, but the large scale, consolidation within Europe hasn't happened. I think they're motorboat reasons
that number one when you look at acquiring accompany you look at growth in that respect,
market and how it will enhance your world business profile
and in many instances german company have looked for growth elsewhere. Some of the central european countries have experienced sluggish growth in many sectors. As the actual return would have
mostly through rationalization
get the labour laws of the European Union is not that easy to achieve that so management
a great deal of letter, respect to come in as an acquirer, let's eat into an italian or french company and start restructuring. It has been very, very tough to differ
seen lots of examples and failure, fear and then to get the growth. People first focused on
those strongly growing asian markets. Now, when you look there, it's not that easy to acquire substantial market positions, and so very often the default was the. U s
it's a large market which grows nicely
and has set a very establish rules how to do things, and people usually had experience with that market because they had a big business there or because they had seen previous examples which have worked and so
it has always taken a priority over internal european consultation. The other thing is, apart from the growth thing has been regulation. Sometimes deregulated doesn't want
if you look at the fact that there are still national regulators, the rat vagueness, national national regulators, act projecting their own industry and protecting the industries. The same was true with some of the german industries, where their special laws to protect them and acquires have found it difficult to come in and, lastly, the question as to how big a market at the end, it is Europe.
A very distinct profile if you acquire a company in Northern Europe, for example in Sweden or Norway,
You do the same in ITALY or Spain is not national. You getting access to markets, you usually getting access to a local markets and you would have to do a cup
of them to really make an impact, so
A rolling up would be quite an effort, as opposed to buy one. U S: company big market in a big market, a smaller company with massive growth opportunities, because the market is just there is that big ended homogeneous. So all of that- and it is the status quo, having said that, with Europe, developing becoming more integrated sometimes have to integrate more, I think we will see more of that cross border consolidation. There would be a real opportunity to be more effect.
Great, more efficiency in the european market. So we're seeing a wave of disruptive pressures affecting markets around the world in Germany is no exception. I see people
may over use this term disruption when the truck met technology
You use it to describe a much broader array of developments in the speed and cycles. Warders disruption mean to you in the context of the german economy and the absolute right of ink the first.
That comes to mind, is clearly of technological disruption. In Germany, with its re be to be kind of focused economy, it has to do with technology, did utilization, automation of industrial processes,
So that's clearly, one of the essential doesn't get a lot of attention. Now we ve got a lot of productivity gains in recent years, have come at an absolutely having a driving force between Let's say to productivity gains in the automotive industry is clearly focused on the automation of automotive production processes, for example, and that has a lot to do with its location, the new technologies and, having said that,
disruption, I would say in Germany, is a much broader term. If you take
very broadly you could say. Disruption has to do with new regulation coming in in many sectors has to do with the changes into commodity markets as input factors for let's eat it.
Motor industry, already utilities energy provision has to do with new distribution models. I e for producers, household goods as an example of our food and consumer goods that are
affected by that is clearly also affecting the german companies working in this respective sectors, and that means adapt new business models search for talent. Now, where do they look for adapting to
those forces. Clearly the? U S, it has a growing technology sector with lots of disruptors and providers of disruptive technical
but also in Germany, when you looked at Berlin and to stop seeing their say very active market,
delivers. New models allotted in retail do not rise in retail business concepts that are coming out of, and so you see tradition,
companies, EDA adapting within the company. I e getting talent in there was very difficult to do, or even as a kind of portfolio approach investing in those business models or many of their disruptors of today and tomorrow I sort of founded by and financed by, traditional companies. As you said, in retail, the big retailer, for example, all have a portfolio of e commerce.
businesses that exactly do what they haven't done or can't do we'll have to spend time and effort on doing in future, which,
The different model odyssey than in the states, typically you'd ever start up, that's funded with venture capital, money and then maybe later and comment buys it to protect themselves rather adapt right. Here you see me
but also a lot of money from their respective sectors in industries and families. Again family on companies goes into funding these new business models. So one of the places where
disruptions, really being felt in particular in Germany, is entered.
clean energy was the focus of this year's Hanover measure? The world's largest industrial conference in Germany made a huge policy shift after the Fukushima nuclear disaster in Japan has increased emphasis on greenhouse
ass reduction, along with the de emphasis of nuclear changed the german energy sector, Germany.
Than two things one. It has clearly promoted renewable energy massively through their respective laws and subsidies and that relates to wind
solar, biomass, all of them.
Then, on the other hand, it has sort of phased out or started to phase out
traditional energy sources in particular Nokia, so that put the system under a lot of stress to adapt with the incoming new.
Degeneration which is dependent on that day. Wind and so on the one hand, and just released more and more capacity that has been base load capacity from big nuclear power plants. So far the system has been in
to cope with it. Last year already, we had thirty three percent of the energy sources that supply german demand coming from renewable, which is quite an effort, is up from close to ten percent up from the year before private, a highest oven, industrialized country absolutely and theirs
massive shift? Ongoing now, obviously, word strain is being felt is partly in the producing industries. They need. A lot of energy is input, because, clearly, this energy is all being equal, more expensive than the traditional generation sources, and then the grid itself and the technology to adapt. With the volatility of this energy provision and mixing goes. Various sources together has put a quite some technological challenges up, but so far this has worked and clearly a big beneficiary was the equipment
history that is supplying all this renewable equipment into the market. Here, when you fly over parts of Germany, it looks like you earn a tropical our country based on the number solar panels so now
Germany's most iconic industries
see the automotive industry.
again facing a very complex array of headwinds.
Rising regulatory pressure or changing expectations, really the consumer.
and a lot of new competitors and what was traditionally and ensure the very high barriers to entry talk a little bit. What these,
changes mean for your clients in the automotive sector and how german firms are adapting to three main topic stare?
from my point of view, which is one the emission regulation per se, all all the world, the emission regulations are getting a lot of focusing getting tougher and tougher, so these companies have to invest a lot to keep up with the new emission standards
It means that, from a certain point on, you will have to move to electric, to plugging hybrid or to full electric vehicle concept which, for the industry, is a man
If shift not only in production, but also in design and in supplies that they need to produce the cars, the second aspect is the digital isolation, which is
not only in production process but also in the car. The content of software and electronics is constantly rising and you need to have the people and the systems to supply that know how and those systems and, lastly, it's the connectivity. So we are talking about.
the self driving Cardy Autonomous, driving a car, and that's a clear shift towards increasing functionality. Did
being done by the machine as opposed to the human being driving a car, so self driving
eyes, are not a fiction. Pre real large parts of the card can already do that. That has to do with sends us that has to do with the systems did automatically correct certain behaviour of the car, and all of that requires massive investment. The industry has spent around thirty four billion,
Altogether, last year's in capital spent capitals manned and in any in capitals, man and a third of that goes to software and different relaxation and new technology. So there is a massive shift. Having said that, it requires sometimes a totally different thinking as well to construct a car, which is an electric car, as opposed to a traditional
engine driven car enhance those kind of know how not only from the parts of the car, but also from the lay out and the whole functionalities to mixed Edward traditional germs.
Car. Engineering philosophy is quite a task. Tesla constructed the car, which is totally driven by its software engineers that look at a car and say this is what the car has to do for us.
systems letters of sister asset, as opposed to the traditional car manufacturing, which has always looked at safety and certain impact that the car has to withstand at certain speeds and all of that and to mix both of them, as I said, is quite a task, and it's also a search and a war for talent in that space who can basically integrate these systems and construct a next generation car. So we talking software engineer software systems, sometimes very small businesses that are only being bought because of the engineers and their capabilities in there, and hence the german car.
Manufacturing industry has to massively shift to this new world to this new talent. To this new way of working and looking in designing a car. On the other hand, they still have to keep up with the tradition
current demand cycles and encourage demanding, ought to sustain their profits that are still driven by large upmarket diesel and gasoline engine cars that are being sold in Europe, the? U S and China in particular
delivered a profit. The low growth environment in Europe has given rise to a low interest rate environment and is also partly responsible for this
He's volatility in global markets we saw in the first quarter of this year. How is that volatility affected?
I'd sentiment in Germany, particularly when it comes to their appetite for deal making.
Germany always has been a bit slower than other countries embarking on large scale. Emanate boards have been more cautious as to the ability to integrate and delivers in it
he's enhance. Hence, when you look at the emanate volumes globally in Europe and in Germany would always see the Germany was somewhat weaker in this respect, the loan,
functional outsize influence in the Middle EAST on to her right
which is not in other than not as prone to be. Making these big transformative deal as larger corporate sight had always been suspicion in the Middle EAST. On of the use of leverage thought they attain to finance with very high a quickie portions of note that virtually I e out of cash flow and hence the idea to lever up to do a big acquisition. Wasn't that form, and now we see some of that receding and people see that they need to move
and if you think about it in the western industrial base, their only so many spots that you can occupy, and I think it dawns too many of those corporate leaders that, in order to occupied certain positions in a western economy, you have to
And you have to make these, otherwise these positions are no longer available because their consolidated away from you so that sentiment, slowly. Shifting but clearly the low interest environment hasn't made a big MIKE on the german corporates to be forward. Leaning on acquisitions,
and in terms of the consumer that consumers be holding up well, although the fact that the savings rates
going down Jamais Germany's a savings gun. Germany savings culture as a kind of put a damper on this spending, and if you follow, the European Central Bank has still not happy or not satisfied with the type of consumption levels that they would like to stimulate through some of their policies.
Chinese companies were very active last year in outbound. Emanate within Europe, particularly Germany, do expect that kind of activity,
Chinese acquirers to continue a link between China and Germany.
often is a win win. China offers a huge market, sometimes not entirely accessible for german companies because of again coming back to the Middle EAST on topic: the systems, the kind of networks to be conquering economic term, a country like China. So there is a market which chinese companies can help opening for german compounds. German companies have technology which chinese companies badly need and saw. You have seen a lot of interest in that respect. A couple of things have been done. Remember the example of key on the german company active in the logistics handling space, where they have a large chinese honour by now mean shoulda, who supports them very actively. So these type of examples exist,
We think that there is a secular movement for the chinese economy to get this technology for the german companies to keep this market in China and grow it to us. You much more on many more of those deals and, as we have heard, motor betimes,
Germany within Europe. The key target for Chinese up on investment, so
a lot of german manufacturers of you said have been big exporters to chinese manufacture.
sector but China, shifting its economy, a bet away from the manufacturing sector into trying to achieve more consumer driven consumer lad economy, so how's that shift as China transforms itself affecting some of these german manufacturers who been really seen dramatic gains in chinese exports. A lot has been said about dead and clearly, if it were to happen, it is NIT Nit, a negative for the german economy because of the focus on capital goods and the fact that Germany has been one of the main beneficiaries of this capital, investment, cyclical capital expenditure, investments, actor that China has gone through
If they were to move more to a consumer economy, there were less german companies that would be very dominant in the spaces that this new economic model would focus on. Having said that, we don T need really, because when you look at some of the numbers and some of what these companies tell us, there's still a pretty robust demand. Clearly, when you look, for example, in a construction industries and the downturn in China, construction that makes it marks on the german equipment suppliers when you look into auto, for example, which is a consumer sickly, a good target towards more wealthy audiences in China, usually because as a premium kind of offering pretty robust demand still and pretty good margin. So we have to see how this Panza activity, if China, where to move more drastically to that position than the german economy, would be soft
there, and this has been one of the key exports but that they have occupied for years. So close, let's talk about the road ahead for german companies in the slightly longer term view. What are you telling clients about the raft of disruptive pressures we discussed here today and why
Those organisations need to do to continue stand amongst the world's best. We are very much focusing on to be able to get the best of what we have in terms of the technological service. People are the inputs data available there
into those companies and to get out of the bay localised can a view of the world and take a very broad view, and that means not only in terms where research is being done, where talent is being hired, how they look at spinning off businesses that have done not that well, and we have seen some of that as well, freeing them up trying to consolidate them differently
I e accelerating corporate development in order to be ready to deal with disruptive forces and again, both internally and organic. If you want way and externally in terms of emanate, growth, be more flexible, for example, on production using some of the very high quality, highly paid production bases for outsourcing for other companies being more flexible. In that sense, thinking more about reinventing some of the distribution as opposed to the traditional models of distribution and clearly, as I said, occupying some of the international positions that have been slow to occupied
So far in order to spread the risk, because the more sort of domestic and focused on traditional high cost production model, they are the mobile
about two, exactly the forces to have been describing and that could be again through
gonna growth on the one hand and organic initiative on the one hand, but also through acquisitive through emanate. Sometimes it is very
enlightening for those companies to spend a week talking to entrepreneurs in the Silicon Valley or in Israel or in China,
and you see how they see the world for those who yours and top management
pace at which they change Hazan exactly and to come back and just say: look: we need to start our own approach in this sense, we can just sit and wait until we are being disrupted, and some of them had no choice. When you look at the traditional energy provided the utilities and what we discussed in terms of the change of the energy mix
had to adapt. They had to find a new business model, being producers of renewable energy suddenly, as opposed to traditional thermal or nuclear, having new distribution models for,
energy trying to capture more along the value chain, also in terms of smart energy, smart consumption models and all of that- and they had to do it, because that traditional business model was being disrupted overnight.
so that's what we are advising on and we have to dial up on Ma Candia solution. Their corporate finance can have to finance those, but a lot of this has come internal and has to be grown internally. It takes a lot of resources and sometimes completely new talent being brought in
apple engineers being brought into the w or diameter to help designing a new infotainment system and thinking differently about how to connect with devices doorstep of things which you can't for somebody to do purely internally because of the lack of experience and the lack of liquidity, inspiration that is coming elsewhere and this kind of transport
I think we should keep this industry alive of can. Thank you very much for joining us exacerbate. That concludes this episode of Exchange, the Goldman Sachs.
see what we hope you join us again. Next, on the spot, gas was recorded on April nineteen, two thousand sixty
The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither
been sacks nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording,
and any liability as a result of this recording is expressly disclaimed.
This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording
does not establish a client relationship with Goldman Sachs.
Transcript generated on 2021-10-15.